So i know about the 4 or so rules for a hardship withdrawal from a 401(K) and the loans you can take out as well but why are these so restrictive on how you take out the money YOU put away in there? I mean i get its a retirement account but come on man. Like the great words from the old insurance commercial, its my money i need it now.
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You gave the answer. It’s intended to save for retirement, and you are given tax advantages to do so. This is why they are restricted, and voluntary. 401(k) were the answers to pension plans that have been phased out by Corporate America and even a lot of state and local governments. Pension plans you would have no access at all to until you retired.
The whole point of a 401(k) is that the government is offering large tax breaks to encourage you to save money for retirement (+/- a company match, which is one more incentive.) This makes sense, because slowly accumulating invested money with interest over decades leads to a lot of money in the end and being able to support yourself after you retire, but a lot of people wouldn’t manage this on their own without an extra nudge.
The alternative is to pay taxes on the money and use it like normal. If you could put tax-free money into a 401(k) then raid it with no rules, the whole point of a special incentive to save money for retirement would be lost. The program ONLY works if there are strict rules and penalties for taking out money early.
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The rules are set by the Government, and enforced by the IRS. When you ask “Why did Congress choose these Rules?” you’re not going to get a good explanation. “It seemed like a good idea at the time” probably doesn’t satisfy you. Some in Congress wanted no withdrawals without penalties, others wanted different “hardships” to be OK, what the law says is the result of negotiation.
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